Note: This essay
was written in response to the Silver Challenge Editorial Contest
at the Free
Market News website. Other authors' treatments of the
same subject, as well as more information on the Editorial Challenge
can be found here.

M.A. Nystrom, M.B.A.
Man on the street in (the Republic of) China
March 1, 2005

1. Introduction

As the brightest star currently on the world's economic
stage, China is attracting increasing media attention and admiration.
The low, single digit growth rates of mature Western economies look
anemic by comparison to China's dazzling two decades of near double-digit
growth. Asia's long slumbering giant is finally awake, and is aggressively
taking its place at the table along side the world's industrialized
economies. After decades of missteps and backward policies under
communism, China has finally caught its economic stride with its
market economy reforms at precisely the time that the West seems
to be faltering.

Is this because China is less burdened by wasteful
government regulation and intervention, which allows its economy
to grow freer? I will investigate this question by first providing
a short historical introduction to post-war Asia, and comparing
China's experience with that of other high growth Asian nations,
most notably Taiwan and Japan. Next I will ask what it means to
have free economic growth, and establish concrete definitions of
economic freedom. Finally, I will measure the conditions in China
and in democratic nations against these definitions and conclude
my argument.

2. Post War Communist China and "Free
Market" Asia

For decades after the Communist Revolution in 1949
under the leadership of Mao Tse Tung, China failed to shine as an
economic power. The country limited its trade primarily to the USSR
and other communist nations, its economy silently imploding at a
time when democratic neighbor Japan adopted a market economy and
grew by leaps and bounds. China's disastrous attempt at a "Great
Leap Forward" from 1958 to the early 1960s stands as a textbook
example of the failures inherent in centralized government planning.
The policy resulted in negative economic growth of over 20% in 1962
alone, and left 30 million dead from starvation.

Shortly after this disaster came the decade of the
Cultural Revolution, another top-down, radical reform attempt initiated
by Mao in 1966. Intended to purify the nation by purging 'enemies
of the state,' it was a nightmare of misguided government power
that disrupted education, government, and daily life for everyone
in China. Under the leadership of Mao, Communist China was one of
the most backward societies and economies in the world. It was only
in the post-Mao period Since Deng Xiaoping's rise to power and subsequent
implementation of China's "open door" policy in 1978 that
China's economy began to grow in the manner that is now grabbing
headlines worldwide.

China however, is merely the latest in a string of
Asian nations that have experienced a rags-to-riches economic transformation.
Following World War II, Japan was the first Asian economy to benefit
from receptive international export markets, a large, disciplined
labor force and an undervalued currency. Like China, postwar Japan
started on the very low end of value-added manufacturing curve,
capitalizing on its competitive advantages by producing labor-intensive
goods for export markets. Like China, Japan experienced double-digit
growth for nearly twenty years as it gradually worked its way up
the value-added chain. This came to be known both domestically and
internationally as the "Japanese Economic Miracle." Following
in the footsteps of Japan came the Little Dragons: Taiwan, Hong
Kong, Singapore and Korea, followed later by the rest of Southeast
Asia: Thailand, Malaysia, Indonesia and now Vietnam.

These Asian nations rose from relative poverty to
high standards of living by employing 'targeted growth' strategies:
Governments first selected high value industries to grow, subsidized
them with public monies, enacted policies to limit imports and promote
exports while at the same time maintaining an undervalued currency.
Pioneered by Japan and copied by her neighbors, this straightforward
formula, bolstered by ample quantities of hard work makes growth
look easy. But with all the government intervention involved, it
can hardly be described as free market growth.

Taiwan is a perfect example of a nation employing
this kind of strategy. In 1973, Taiwan's government realized that
the nation needed to upgrade its primarily agricultural-based economy.
The government began a targeted industrial development plan, channeling
tens of millions of dollars of public money into an integrated circuit
(IC) research and development program. Prior to this, Taiwan was
simply a low-cost assembler of final electronics goods for larger
multinational firms, possessing little domestic technical expertise
of her own. The plan was controversial, with many believing that
the government had no business making such investments, and others
fearing that Taiwan lacked the technical skill to handle such advanced
technology. The end result, however, was a resounding success. Today
Taiwan is the world's leader in semiconductor foundries, with over
60% of the world's market share. Taiwan Semiconductor Manufacturing
(NYSE:TSM) and United Microelectronics (NYSE:UMC), the world's two
largest semiconductor foundries, are the direct result of this government-sponsored
plan.

TSM pioneered a completely new IC business model in
1987 - the "fabless" IC firm. Freed from the burden, expense
and excessive risk of building their own semiconductor foundries
- something that can cost billions to build and maintain - hundreds
of fabless design firms sprang up in the US and Taiwan. This caused
the entire industry to become more nimble, extremely competitive,
and spawned voracious growth. But as we see, voracious growth should
not be confused with free market growth.

In contrast to China's disastrous policies of the
60's and 70's, Taiwan's government policies were a resounding success,
and Taiwan is favorably viewed as a free market economy. But this
does not change the fact that Taiwan's success was not the result
of free market policies. Risk was shifted from private companies
in the US and Taiwan onto the taxpayers of Taiwan, who financed
the expensive foundries.

3. What is Free?

Taiwan is the global rule rather than the exception.
No economy grows completely free, because all economies are subject
to government rules, regulations and interventions. Even the United
States, believed to be one of the freest economies in the world
is home to its own forms of government regulations, bureaucracy
and favoritism that interfere with free market growth. To say that
one economy is freer than another would therefore mean that it has
less government intervention than the other, regardless of whether
that intervention is has a positive or negative effect on growth.
Government intervention also occurs at many levels of an economy,
from very basic laws that regulate the behavior of citizens, all
the way up to macroeconomic policies that govern the rules by which
the economy interacts with other economies.

The U.S. constitution is the venerable standard by
which individual freedom can be measured: "We hold these truths
to be self-evident," it states. "That all men are created
equal, that they are endowed by their Creator with certain unalienable
Rights, that among these are Life, Liberty and the pursuit of Happiness.
That to secure these rights, Governments are instituted among Men,
deriving their just powers from the consent of the governed."

Freedom and justice at the individual level is the
foundation of a free society and a free economy. The United States,
the nations of Western Europe, Japan and Taiwan all have democratic
governments that "[derive] their just powers from the consent
of the governed." As such, individuals' unalienable rights
are guaranteed, including the right to freedom of self expression,
the ability to choose the number of children in one's family, freedom
to choose which religion to practice, freedom to peacefully organize,
and the right to own property. Individuals are guaranteed protection
from the State's powers by due process of law.

4. Is China Free?

The individual human rights that are taken for granted
in democratic nations are still only a dream in China, where one
party, the Communist Party of China, rules the nation without input
or representation from those governed. The result is a number of
draconian laws and policies that seem antiquated by modern standards.
Families are limited to one child. Religion is outlawed, and individuals
can be jailed or executed for practicing or teaching their beliefs.
The government is extremely nervous about groups organizing, so
this is outlawed. This means that labor unions are illegal. All
land is still owned by the government, so "buyers" simply
sign a 99-year lease for the right to use it the property on it.
This right can, however, be arbitrarily retracted at any time for
any reason by the government without due process of the law. It
is clear that individual liberty and freedom do not yet exist in
China. But the words, "9% annual growth" seem somehow
to blind observers to these facts.

At the macroeconomic level, China maintains a fixed
currency peg of 8.28 yuan to the dollar, undermining any ability
for the currency to find its true value in a free and open marketplace.
Some experts estimate the yuan is undervalued by 30 - 50% as a result.
But it is this artificially undervalued currency by which all resource
inputs are valued. Low local costs of production are at the root
of China's current competitive advantage, but it is artificially
engineered by government policies. This is the antithesis of a free
market. Once again, "9% annual growth" makes people forget
this plain fact.

In all fairness, China has made great progress from
the days of the Great Leap Forward, and the Cultural Revolution.
This is true. China has liberalized her economy and has adopted
market reforms, but these are in the context of authoritarian rule.
They are hopefully the first steps toward democracy and a true free
market economy. But the world seems to have been blinded to the
reality of China's authoritarianism by the brightness of her economic
growth. China is a great place to do business precisely because
the rights of individuals are denied, not protected, by their government.
As Chairman Mao once said, "Political power grows from the
barrel of a gun."

5. Conclusion

As we can see, neither at the micro level, nor the
macro level does China exhibit the signature patterns of a free
market economy. This being the case, how is it possible that we
can call growth in China free? Is China's economy growing voraciously?
Absolutely. Is China's economy growing freer than it was before?
There is no questionthat the answer is yes.

But is China growing freer than the West?

As long as authoritarian powers maintain arbitrary
control over everything from the minute details of people's lives
to the exchange rate of the currency, this question does not even
make sense.

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